Inari recorded 9MFY26 core net profit of RM143.4m (-28% YoY), broadly in line with both our (79%) and consensus (71%) forecasts. 3QFY26 core earnings of RM30.8m (-49% YoY, -47% QoQ) were arrived after adjusting for EIs comprising an unrealised forex gain (RM0.7m) and allowance for slow moving inventories (RM3.5m).
GP margin compressed sharply to a multi-year low of 15.7% (from 23.0% in 2QFY26) on weaker RF utilisation and unfavourable product mix. On a more constructive note, Inari was named a founding member of the government-backed MAPC, while Customer B is targeting 2x order volume growth in datacom photonics over FY27-FY28.
No changes to FY26/27/28F forecasts. Downgrade to SELL (from HOLD) following the share price run-up to RM1.98, with TP maintained at RM1.41 based on 25x PE on FY27F core EPS of 5.6 sen.
Earnings in line. Inari recorded 3QFY26 core net profit of RM30.8m (-49% YoY, -47% QoQ), bringing 9MFY26 core earnings to RM143.4m (-28% YoY) – broadly in line with both our forecast (79% of FY26F) and consensus (71% of FY26F) as we foresee a seasonally weaker 4QFY26 compounded by the CK1 fire disruption. 3QFY26 core earnings were arrived after adjusting for EIs comprising an unrealised forex gain of RM0.7m and allowance for slow moving inventories of RM3.5m.
QoQ. Revenue declined 13.4% QoQ to RM265.7m, driven by lower RF loading volume heading into a seasonally softer period following the lapse of peak handset sales in the preceding quarter. More critically, GP margin compressed sharply to 15.7% (from 23.0% in 2QFY26), its lowest level in at least two years. We attribute this to the combination of weaker RF assembly utilisation, unfavourable product mix as the proportion of higher-margin testing revenue diminished, and persistent RM/USD headwinds. The margin deterioration drove core earnings down 47% QoQ despite administrative expenses declining to RM27.9m (from RM42.7m in 2QFY26).
YoY. Core net profit plunged 49% YoY, with the revenue contraction of 13.8% amplified by a 460bp GP margin compression (15.7% vs 20.3% in 3QFY25). The structural driver remains unchanged: Customer B continues to optimise its RF portfolio by phasing out lower-value discrete and mid-band products while shifting focus to premium high-band modules, which are predominantly assembled by Inari's Taiwanese peers. For 9MFY26, core earnings of RM143.4m declined 28% YoY, with the cumulative GP margin of 19.9% reflecting the progressive margin dilution across each successive quarter.
Dividend. Declared third interim dividend of 1.0 sen per share, bringing 9MFY26 total DPS to 3.66 sen (vs 9MFY25: 4.30 sen). The entitlement and payment dates are 15 June 2026 and 10 July 2026 respectively.
Cashflow and Balance Sheet. Operating cash flow for 9MFY26 was a healthy RM250.1m (+4.4% YoY), supported by favourable working capital releases from lower receivables (-RM30.6m) and inventories (-RM15.7m), while capex was restrained at RM57.9m (vs RM83.0m in 9MFY25). The group's balance sheet remains in pristine condition with net cash of RM2.18bn (RM0.57/share), zero borrowings and RM339.5m in unutilised private placement proceeds earmarked for capex and acquisitions (deadline: July 2027). Capital commitments stood at RM30.4m. The fortress balance sheet provides significant optionality supporting the advanced packaging pivot.
Outlook. The near-term outlook remains challenging. The fire at Philippines plant CK1 on 10 May has temporarily shut down the entire 125,000 sq ft facility (c.10% physically damaged), with resumption contingent on power line reinstallation within 2-4 weeks, and we expect some delivery slippage into 4QFY26 despite management redirecting wafer processing to Penang and relocating equipment to CK2. The proposed Lumileds joint acquisition was formally terminated in April 2026 after CFIUS objections relating to Sanan's 74.5% stake, enabling management to refocus on core operations. On a more constructive note, Inari Technology was named a founding member of the government-backed Malaysia Advanced Packaging Consortium (MAPC) on 8 May, backed by RM92m in Mosti R&D grants and RM93.8m in industry matching contributions over 24 months, directly aligned with Inari's c.RM70m pilot line investment and providing a de-risked pathway into advanced packaging assembly, a segment commanding 40-50% profit margins versus traditional OSAT. Furthermore, beyond near-term RF headwinds the datacom photonics segment (c.17% of revenue) is emerging as a compelling growth vector, with Inari undertaking back-end processing of InP wafers and chip-on-carrier assembly for Customer B's EML/DFB laser products used in 800G/1.6T optical transceivers for AI data centres. Our channel checks indicate Customer B is targeting a 2x increase in order volumes to Inari over FY27-FY28 amid structurally tight global laser supply, and management expects optoelectronics to contribute more than a third of group revenue by FY27-FY28. The FY27 handset cycle remains the key near-term re-rating catalyst, with management guiding c.30-35% revenue growth toward RM1bn.
Forecast. We make no changes to our FY26/27/28F core NP forecasts of RM182.6m/RM213.2m/RM217.3m as 9MFY26 results came in broadly in line with our expectations. We continue to bake in conservative RF volume assumptions and a cautious margin outlook amidst the prevailing forex headwinds and near-term CK1 fire disruption. However, we note that the MAPC consortium participation and the 2x order volume growth guided by Customer B in datacom photonics over FY27-FY28 represent upside risks to our forecasts.
Valuation. We downgrade the stock to a SELL (from HOLD) following the recent share price run-up to RM1.98, which we view as unjustified against the current earnings backdrop. Our TP is maintained at RM1.41, based on unchanged 25x PE applied to FY27F core EPS of 5.6 sen. Our target multiple represents c.-0.5SD to its five-year historical mean PE, which we view as appropriate given the soft near-term earnings trajectory, CK1 fire disruption and execution risks. At RM1.98, the stock trades at c.35.2x FY27F PE, implying a total return of -26.5% (including c.2.3% dividend yield), well beyond our -10% threshold for a SELL rating. We see limited catalyst for the current valuation premium to sustain until there is greater clarity on the FY27 handset cycle outcome and Inari's advanced packaging customer wins. That said, the datacom photonics segment, where Customer B is targeting a 2x increase in order volumes over FY27-FY28 amid structurally tight optical laser supply, and the MAPC consortium participation provide credible medium-term growth vectors that could warrant a re-rating if the optoelectronics revenue mix shifts materially above one-third of group revenue as we expect.
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| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 3.949723 | 3.981539 |
| EUR | 4.614340 | 4.619218 |
| CNY | 0.585739 | 0.586367 |
| HKD | 0.504357 | 0.507919 |
| SGD | 3.092670 | 3.114543 |